American Bar Association President James Silkenat wants to convince members of Congress this week that the leading tax reform proposals on Capitol Hill would harm not only law firms and lawyers but also the businesses and other clients who hire them.

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What's being said

I am not a tax lawyer. And I understand that point of the prior comment about "accounting tricks." But that misses the essential point. This proposal is not tax simplification. It just adds additional complexity to a tax system that already is too complex. We need to simplify the tax system, not make it more complicated under the guise of raising revenue. This proposal is a major step in the wrong direction. One should not have to be a tax expert to figure out how to report and pay taxes.

Privately

Apr 09, 2014

From a tax perspective, the difference between cash and accrual accounting is supposed to be just timing - assuming nobody is trying to play tax games. That is the key. It is much easier to play tax games with cash accounting than with accrual accounting.

Simple example: a corporate client which is on accrual accounting will accrue the amount it will pay counsel in 4Q - but a cash-basis counsel may ask for the check to be mailed at the end of December so it is recorded in January revenue. Client reports the expense on one year‘s tax return, but the firm gets to delay declaring the revenue (and having it become taxable income) until the following tax year. Similarly, a cash basis firm can manipulate its tax bill by accelerating or delaying paying expenses, salaries, bonuses, etc. across accounting period boundaries. These are very simple examples - there are much more subtle and sophisticated games that can be played, which the government apparently thinks will exceed $23B over the next decade if not curtailed.

Contrary to what Mr. Silkenat says, nothing in a change to accrual accounting will require clients to pay firms immediately. any more than accounting rules require any customer to pay a supplier on a specific schedule (accounting rules just don‘t do that). A change to accrual accounting will also not require firms to pay taxes on fees they never receive (or at least not permanently). Just like any accrual entity, firms will have to adopt revenue recognition policies (presumably in line with GAAP), and will be able to have accruals for doubtful accounts, etc. If accrued fees don‘t actually come in, they can be written off (same net effect as if they had never been accrued).

Most of the big firms‘ corporate clients are already on accrual accounting - this will just align large law firm accounting practices with their clients‘ practices.

So, while it is understandable that the President of the ABA would not want to see large firms (presumably like his own firm) lose a very lucrative opportunity to benefit from manipulating their tax bills, he should not try to dress the effort up as anything other that.